Engineer. / Constr. & Drill & Blast

Transcription

1 Engineer. / Constr. & Drill & Blast SRG Ltd (SRG) SRG LTD (SRG) Good EBITDA result, but cash flow disappointing SRG Ltd reported 1H18 NPAT of $2.4m (we expected $2.2m). A 2cps DPS declared (we expected 3cps). EBITDA was $6.3m, including $0.9m restructuring costs. Normalised EBITDA was $7.2m (we expected $6.4m). Operating cash flow was an outflow of $2.3m (we expected $7.2m in-flow). Working capital was negative due the cash retained in the JVs and the mix shift towards direct labour (which is more working capital intensive). The Company expects much closer to full cash realisation in the 2H. Capex was $5.3m (including $3.6m H.P. this half). Net cash was $3m. Hartleys expects FY18 EBITDA $18.1m, FY19 $21.4m Company guidance is for FY18 EBITDA $15-20m (including the $0.9m restructuring charge) on revenue of $ m (inclusive of JV revenue). The Company explains that the EBITDA margin improvement expected in 2H is due to higher margin work although we also assume increasing overheads. Work in hand at 31 December 2017 for the Company was $307.0m compared to $249.4m at the same time last year. We assume FY18 EBITDA of $18.1m and expect NPAT of $7.8m with 3cps final DPS. For FY19, we assume revenue grows to $311m and EBITDA of $21.4m for NPAT of $9.5m. We assume 9.0cps DPS. Move to Speculative Buy (from Buy) On our estimates, SRG trades on FY19 EV/EBIT of 7.4x. If the Company can deliver the substantial growth implied in our medium term forecasts, then it is very cheap. We are moving to a Speculative Buy recommendation (from Buy) given it is a speculative assumption that the growth rates can be met, and recent cashflow profit results have been on the soft side. The potential for the SRG business is very significant (especially the USA business), and our price target now reflects the potential, but it has to be considered to have more speculative assumptions behind it. Hence our Speculative Buy recommendation. Fig. 1: Earnings Changes 6/17A 6/18F 6/19F Profit & Loss ($m) actual Old New % diff Old New % diff Revenue % % - mining % % - civil % % EBITDA % % - margin 5.0% 6.1% 6.9% 12.6% 6.0% 6.9% 14.0% EBITDA ex internat. o/head margin 6.4% Depreciation/Amortisation % % EBIT % % - margin 2.8% 3.9% 4.5% 15.6% 4.1% 4.7% 14.9% Net Interest % % Pretax Profit % % - margin 3.9% 3.8% 4.4% 15.5% 3.9% 4.5% 14.8% Tax % % Norm. NPAT Pre Minorities % % - margin 1.8% 2.6% 3.0% 15.5% 2.7% 3.1% 14.8% Minorities Abnormals (net of tax) Reported Profit % % Source: Hartleys Estimates. 28 Feb 2018 Share Price: $1.690 Valuation: $ mth price target: $2.54 Brief Business Description: Global specialist construction services for CBD, dams and bridges. Drill and blast services for Aust mining. Hartleys Brief Investment Conclusion Strong management team and high levels of revenue certainty. Chairman & operations director: Peter McMorrow (Chairman, Non-exec.) David Macgeorge (MD) Substantial shareholders: Peter McMorrow (Chairman) (6.5%) JMFG Consol. A/C (6.1%) Perennial (5.7%) Company Address: Level 1, 338 Barker Rd Subiaco, WA, 6008 SRG.asx Speculative Buy Issued Capital: - fully diluted Market Cap: - fully diluted Net Debt (31 Dec '17a): FY17a FY18e 65.6m 72.8m $110.9m $123.0m -$3.0m FY19e Op Cash Flw Free Cash Flw NPAT* (A$m) EPS ($, bas) P/E (basic) 13.8x 15.0x 11.7x P/E (diluted) 29.0x 15.7x 12.9x EV / EBITDA 9.5x 6.0x 5.1x DPS (cps) Franking 100% 100% 100% Dividend Yield 4.1% 3.0% 5.3% N.D. / equity -18% -10% -11% Source: Hartleys Research. * normalised A$ M Mar-17 SRG Limited Jul-17 Nov-17 Authors: Trent Barnett Head of Research Ph: E: trent.barnett@hartleys.com.au. Feb-18 Volume - RHS Source: IRESS SRG Shareprice - LHS Sector (S&P/ASX SMALL INDUSTRIALS) - LHS Analyst has a beneficial interest in SRG.asx. Hartleys has provided corporate advice within the past 12 months for which it has earned fees. See back page for disclaimers. 9. Hartleys Limited ABN (AFSL ) 141 Page St Georges 1 of 7 Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys regulatory disclosures can be found on Hartleys website

2 SRG Ltd (SRG) Recommendation: Speculative Buy Company Information Profit & Loss ($m) 6/16A 6/17A 6/18F 6/19F Date 28 Feb 2018 Level 1, 338 Barker Rd Mining - Rev Share Price $1.690 Subiaco, WA, 6008 Mining - EBITDA Week High-Low $ $1.15 Ph: Mining - Margin 16.6% 16.3% 16.0% 16.0% Market Cap ($m) $110.9 Construction - Rev (100%) Enterprise Value ($m) $ Construction - EBITDA (100%) Ordinary Shares 65.6 Construction - Margin 5.3% 6.5% 8.0% 8.0% Fully Diluted Shares 72.8 Group Revenue Valuation growth 3.5% 29.4% 14.7% 17.8% Spot DCF (WACC 12.4%, Terminal growth 0.00%) $2.14 EBITDA margin 8.2% 5.0% 6.9% 6.9% 12mth fwd DCF (WACC 12.4%, Terminal growth 0.00%) $2.27 Rep. Depreciation/Amortisation mth forward P/E base case earnings of 14x (peak-cycle) $2.28 Norm. EBIT Dec17a 1x Price / NTA (1x $0.98) $0.98 EBIT / Sales 5.2% 2.8% 4.5% 4.7% 12mth fwd Div Yield of 4.5% (Gross yield=6.4%) $2.01 Net Interest Months Price Target (wgted avg above 4 avg) $2.54 Profit Before Tax margin 5.2% 2.7% 4.4% 4.5% PBT ex internat. o/head P / E (6/19F) at price target 19.4x Tax P / E (6/20F) at price target 15.7x Effective Tax Rate 32.9% 32.3% 32.3% 32.3% EV/EBITDA (6/20F) at price target 6.0x NPAT Pre Minorities EV/EBIT (6/20F) at price target 8.5x Net Profit / Sales 3.5% 1.8% 3.0% 3.1% Multiples (S/price at $1.69) 6/16A 6/17A 6/18F 6/19F P / E (reported, basic weighted) 17.2x 13.8x 15.0x 11.7x Minorities P / E (normalised, dil. weighted) 19.8x 29.0x 15.7x 12.9x Normalised NPAT to equity P / E (mkt cap / norm. NPAT) 17.9x 26.2x 14.1x 11.6x Abnormals / discontinued P / E (fully diluted mkt cap / norm. NPAT) 19.8x 29.0x 15.7x 12.9x Reported Profit to equity Dividend Yield 3.6% 4.1% 3.0% 5.3% Group Free Cash Flow (f.c.f) / EV 10.5% 1.0% 2.0% 6.9% Reported EPS (basic, w'ghted) Equity f.c.f. / Mkt Cap 5.2% -1.2% -0.7% 4.1% Normalised EPS (weighted) Norm f.c.f. / Mkt cap 3.3% -8.3% -5.2% 1.3% Normalised EPS (full. diluted) Mkt cap / operating cash flow 8.1x 15.9x 17.9x 10.5x DPS (cps) EV/EBITDA multiple 7.4x 9.5x 6.0x 5.1x Franking 100% 100% 100% 100% EV/EBIT multiple 11.8x 16.9x 9.0x 7.4x Payout Ratio 60.9% 106.0% 41.3% 41.3% Price / Book Value 1.3x 1.3x 1.2x 1.2x Price / NTA 1.8x 1.7x 1.6x 1.5x Cashflow Statement ($m) 6/16A 6/17A 6/18F 6/19F Cash Receipts EBITDA Ratios 6/16A 6/17A 6/18F 6/19F Working Capital Change Return on Average Equity 7.9% 5.1% 8.9% 10.1% Cash from Operations Return on Assets 5.0% 3.2% 5.4% 6.1% Net interest Paid ND / ND + Equity -29.1% -22.1% -11.0% -12.7% Tax Paid ND / Equity -22.5% -18.1% -9.9% -11.3% Net Operating Cash Flow Net Interest Cover (EBIT) Capital Expenditure ROIC 10.7% 6.9% 11.2% 12.3% Asset Sales Other (inc Investments) Free Cash Flow Analysis ($m) 6/16A 6/17A 6/18F 6/19F Net Investing Cash Flow Net Operating Cash Flow Proceeds from Equity Issues Capex (Reported) Net Change in Debt & Leases Group Free Cash Flow (reported) Dividends Paid Fixed Debt Repayments Net Financing Cash Flow Equity Free Cash Flow (reported) Movement in Cash HP Lease Capex (non-cash) HP Lease Capex (non-cash) Free Cash Flow (normalised) Capex (inc HP) / depreciation 83% 273% 147% 90% Balance Sheet ($m) 6/16A 6/17A 6/18F 6/19F Cash Share Data 6/16A 6/17A 6/18F 6/19F Receivables Ord Issued shares (m) Inventories growth 0.0% 1.9% 1.2% 4.7% Other Weighted ave shares (m) Total Current Assets growth 0.0% 1.5% 0.8% 2.4% Property, Plant & Equipment Diluted shares wgted (m) Intangibles growth 0.0% 10.8% 1.5% 0.7% Other Total Non Current Assets Unpaid Capital Total Assets Year Expires Number % ord Avg Price $m unpaid Accounts Payable Jun , % $ - $ - Interest Bearing Liabilities Jun-19 3,075, % $ 0.62 $ 1.9 Other Jun-20 1,500, % $ - $ - Total Current Liabilities Jun , % $ - $ - Accounts Payable Jun-22 1,300, % $ - $ - Interest Bearing Liabilities TOTAL 7,175, % $ 0.27 $ 1.9 Other Directors & Senior Management Subs. S/holders Total Non Current Liabilities Peter McMorrow (Chairman, Non-exec.) Peter McMorrow (Chairman) 6.5% Total Liabilities David Macgeorge (MD) JMFG Consol. A/C 6.1% Net Assets Robert Freedman (non-exec) Perennial 5.7% Net Asset Value / Share ($) Peter Brecht (non-exec) NTA / Share ($) Michael Atkins (non-exec) Net Debt (net cash) Roger Lee - CFO Analyst: Trent Barnett Phone: Sources: IRESS, Company Information, Hartleys Research Last Earnings Estimate Changes: 28 February 2018 Page 2 of 7

3 Guidance is for stronger 2H margins but we assume some increased overheads in the USA JV Fig. 2: P&L and Balance sheet Profit & Loss ($m) Dec-14(a) Jun-15(a) Dec-15(a) Jun-16(a) Dec-16(a) Jun-17(a) Dec-17(a) Jun-18(e) Contract Mining - Rev Contract Mining - EBITDA Contract Mining - Margin 15.6% 19.9% 21.1% 12.2% 15.3% 17.2% 15.8% 16.2% Construction - Rev (100%) Construction - EBITDA (100%) Construction - Margin 5.6% 1.2% 4.4% 5.9% 5.6% 7.5% 6.5% 8.8% Group Revenue sequential growth -10.1% -6.5% -2.4% 19.5% 22.3% -5.7% -6.1% 51.6% EBITDA margin 9.0% 7.3% 7.2% 9.0% 4.5% 5.4% 6.9% 6.9% Depreciation/Amortisation EBIT EBIT / Sales 4.1% 2.9% 3.7% 6.4% 2.6% 2.9% 3.9% 5.0% Net Interest Profit Before Tax margin 4.0% 3.0% 3.7% 6.4% 2.6% 2.8% 3.8% 4.8% PBT ex internat. o/head Tax Effective Tax Rate 32.2% 41.0% 33.3% 32.6% 30.0% 34.5% 30.0% 33.4% NPAT Pre Minorities Net Profit / Sales 2.7% 1.8% 2.5% 4.3% 1.8% 1.9% 2.6% 3.2% Minorities Normalised NPAT to equity Abnormals / discontinued Reported Profit to equity Net cash affected by working capital requirements JVs set up to perform contracts with partners Reported EPS (basic, w'ghted) Normalised EPS (weighted) Normalised EPS (full. diluted) DPS (cps) Franking 100% 100% 100% 100% 100% 100% 100% 100% Payout Ratio 84.2% 276.1% 62.3% 60.3% 41.2% 80.6% 54.2% 39.7% Balance Sheet ($m) Dec-14(a) Jun-15(a) Dec-15(a) Jun-16(a) Dec-16(a) Jun-17(a) Dec-17(a) Jun-18(e) Cash Receivables Inventories Other Total Current Assets Property, Plant & Equipment Intangibles Other Total Non Current Assets Total Assets Accounts Payable Interest Bearing Liabilities Other Total Current Liabilities Accounts Payable Interest Bearing Liabilities Other Total Non Current Liabilities Total Liabilities Net Assets Net Asset Value / Share ($) NTA / Share ($) Net Debt (net cash) Source: Hartleys Estimates, SRG Page 3 of 7

4 Weak free cashflow. Expected to improve in 2H increase Fig. 3: Cash Flow Cashflow Statement ($m) Dec-14(a) Jun-15(a) Dec-15(a) Jun-16(a) Dec-16(a) Jun-17(a) Dec-17(a) Jun-18(e) Cash Receipts EBITDA Working Capital Change Cash from Operations Net interest Paid Tax Paid Net Operating Cash Flow Capital Expenditure Asset Sales Other (inc Investments) Net Investing Cash Flow Proceeds from Equity Issues Net Change in Debt & Leases Dividends Paid Net Financing Cash Flow Movement in Cash HP Lease Capex (non-cash) Free Cash Flow Analysis ($m) Dec-14(a) Jun-15(a) Dec-15(a) Jun-16(a) Dec-16(a) Jun-17(a) Dec-17(a) Jun-18(e) Net Operating Cash Flow Capex (Reported) Group Free Cash Flow (reported) Fixed Debt Repayments Equity Free Cash Flow HP Lease Capex (non-cash) Free Cash Flow (normalised) Capex (inc HP) / depreciation 16% 36% 27% 147% 169% 356% 171% 124% Source: Hartleys Estimates, SRG Fig. 4: Earnings Changes 6/17A 6/18F 6/19F 6/20F Profit & Loss ($m) actual Old New % diff Old New % diff Old New % diff Revenue % % % - mining % % % - civil % % % EBITDA % % % - margin 5.0% 6.1% 6.9% 12.6% 6.0% 6.9% 14.0% 6.0% 6.9% 15.2% EBITDA ex internat. o/head margin 6.4% Depreciation/Amortisation % % % EBIT % % % - margin 2.8% 3.9% 4.5% 15.6% 4.1% 4.7% 14.9% 4.2% 4.8% 14.7% Net Interest % % % Pretax Profit % % % - margin 3.9% 3.8% 4.4% 15.5% 3.9% 4.5% 14.8% 4.1% 4.7% 15.1% Tax % % % Norm. NPAT Pre Minorities % % % - margin 1.8% 2.6% 3.0% 15.5% 2.7% 3.1% 14.8% 2.8% 3.2% 15.1% Minorities Abnormals (net of tax) Reported Profit % % % Net Debt % % % Capex % % % DPS % % % Source: Hartleys Estimates, IRESS Page 4 of 7

5 PRICE TARGET We have updated our price target to $2.54 (from $1.86). SRG Price Target Methodology Weighting Spot 12 mth out DCF (WACC 12.4%, Terminal growth 0.00%) 30% $2.14 $ mth forward P/E base case earnings of 14x (peak-cycle) 20% $1.92 $ mth forward EV/EBIT of 6x (mid-cycle) 5% $1.27 $ mth forward EV/EBIT of 14x (peak-cycle) 35% $2.78 $3.38 Dec17a 1x Price / NTA (1x $0.98) 5% $0.98 $ mth fwd Div Yield of 4.5% (Gross yield=6.4%) 5% $1.12 $2.01 Risk weighted composite $2.17 $ Months Price Target $2.54 Shareprice - Last $ mth total return (% to 12mth target + dividend) 54% Source: Hartleys Estimate Fig. 5: Key assumptions and risks for valuation Assumption Revenue reached ~$560m by FY23 Risk of not realising assumption Downside risk to valuation if assumption is incorrect Comment High High The outlook for the industry suggests that this is achievable EBITDA margins ~7.0% Moderate to High High Appears reasonable based on 2H18 guidance Capex is low Moderate Moderate SRG is predominantly a services business, and hence capex is low. Note, the drill & blast division is capital intensive, and hence there will be an eventual capex replacement cycle. No substantial acquisitions High Upside / Downside We believe it s likely SRG makes further acquisitions Conclusion Source: Hartleys We believe our growth assumptions have a moderate to high risk of not being achieved on the timeline we assume and hence our Speculative recommendation RISKS The key risks for SRG (like most industrial companies) is earnings disappointments given the industry is volatile and earnings can disappoint due to cost overruns, project delays, loss of contracts or slower than anticipated new project wins. Although some earnings disappointments can be short term and just a timing issue, other disappointments can be materially value destructive and can sometimes overhang stocks for a long period of time (for example contract disputes). Such disappointments can be very difficult to predict and share price reactions can be severe and immediate upon disclosure by the company. High financial leverage can increase the impact. Page 5 of 7

6 EV/EBIT BANDS Fig. 6: Using Hartleys base case forecasts Shareprice SRG Actual Hartleys Target 12x EV/EBIT 10x EV/EBIT 8x EV/EBIT 6x EV/EBIT 4x EV/EBIT Source: Hartleys Estimates, IRESS Page 6 of 7

7 HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Head of Research Mike Millikan Resources Analyst John Macdonald Resources Analyst Paul Howard Resources Analyst Aiden Bradley Research Analyst Oliver Stevens Research Analyst Michael Scantlebury Junior Analyst Janine Bell Research Assistant Corporate Finance Dale Bryan Director & Head of Corp Fin. Richard Simpson Director Ben Crossing Director Ben Wale Director Stephen Kite Director Scott Weir Director Scott Stephens Associate Director Rhys Simpson Associate Director Registered Office Level 6, 141 St Georges TcePostal Address: PerthWA 6000 GPO Box 2777 Australia Perth WA 6001 PH: FX: info@hartleys.com.au Note: personal addresses of company employees are structured in the following manner:firstname.lastname@hartleys.com.au Hartleys Recommendation Categories Buy Accumulate Neutral Reduce / Take profits Sell No Rating Speculative Buy Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a Buy. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a Buy. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk. Institutional Sales Carrick Ryan Justin Stewart Simon van den Berg Chris Chong Digby Gilmour Veronika Tkacova Wealth Management Nicola Bond Bradley Booth Adrian Brant Nathan Bray Sven Burrell Simon Casey Tony Chien Tim Cottee David Cross Nicholas Draper John Featherby Ben Fleay James Gatti John Goodlad Andrew Gribble David Hainsworth Murray Jacob Gavin Lehmann Shane Lehmann Steven Loxley Andrew Macnaughtan Scott Metcalf David Michael Jamie Moullin Chris Munro Michael Munro Ian Parker Matthew Parker Charlie Ransom (CEO) Mark Sandford David Smyth Greg Soudure Sonya Soudure Dirk Vanderstruyf Samuel Williams Jayme Walsh Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN ( Hartleys ), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has provided corporate advice to SRG Limited ("SRG") within the past 12 months, for which it has earned fees. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. Page 7 of 7